TRANSFIELD V.

CA

FACTS:

Petitioner and respondent entered into a Turnkey Contract, wherein the petitioner, undertakes to
construct, a 70-Megawatt hydro-electric power station at the Bakun River in the provinces of
Benguet and Ilocos Sur. The target completion date of the Project shall be on 1 June 2000
petitioner is entitled to claim extensions of time (EOT).

To secure performance of petitioner's obligation, petitioner opened in favor of LHC two (2)
standby letters of credit with the local branch of respondent Australia and New Zealand Banking
Group Limited (ANZ Bank) and Security Bank Corporation (SBC).

Petitioner sought various EOT to complete the Project, however, LHC denied the requests. LHC
then filed a Request for Arbitration before the Construction Industry Arbitration Commission
(CIAC) and another Request for Arbitration before the International Chamber of Commerce.

Petitioner advised the banks of the arbitration proceedings already pending before the CIAC and
ICC and asserted that LHC had no right to call on the Securities until the resolution of disputes
before the arbitral tribunals. However, LHC served notice that it would call on the securities for
the payment of liquidated damages for the delay.

Petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary restraining order
and writ of preliminary injunction, against herein respondents before the RTC.

RTC Decision:
LHC should be allowed to draw on the Securities for liquidated damages. The banks were mere
custodians of the funds and as such they were obligated to transfer the same to the beneficiary
for as long as the latter could submit the required certification of its claims.

CA Decision:
Court of Appeals issued a temporary restraining order, enjoining LHC from calling on the Securities
or any renewals or substitutes thereof and ordering respondent banks to cease and desist from
transferring, paying or in any manner disposing of the Securities. However, upon expiration of
the TRO, CA conformed with the RTC’s decision that LHC could call on the securities.

ISSUES:
1. WON LHC has the right to call on the securities.

RULING:
Yes, the settlement of a dispute between the parties is not a pre-requisite for the release of funds
under a letter of credit.

The "independence principle" in the Letters of Credit under Commercial Law assures the seller or
the beneficiary of prompt payment independent of any breach of the main contract and precludes
the issuing bank from determining whether the main contract is actually accomplished or not.

Here, the petitioner was on default and such issue remains pending for arbitration. Hence, prompt
payment may be made during the litigation.

Therefore, LHC was correct in calling for the securities.

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Standby credit has different expectations. He reasonably expects that he will receive cash in the
event of nonperformance, that he will receive it promptly, and that he will receive it before any
litigation with the obligor (the applicant) over the nature of the applicant's performance takes
place. During litigation, the beneficiary, not the applicant, holds the money.
In the standby credit case, however, the beneficiary avoids that litigation burden and receives his
money promptly upon presentation of the required documents. In case where the beneficiary’s
presentation of documents were not rightful, the applicant may sue the beneficiary in tort, in
contract, or in breach of warranty.

Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court,
did petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction.

Injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes
fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the
main agreement; and (c) irreparable injury might follow if injunction is not granted or the recovery
of damages would be seriously damaged.

In fact, LHC was merely enforcing its rights in accordance with the tenor of the Turnkey Contract.
Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith. Petitioner could have incorporated in its Contract with LHC,
a proviso that only the final determination by the arbitral tribunals that default had occurred
would justify the enforcement of the Securities.

Banks were under no obligation to determine the veracity of LHC's certification that default has
occurred. Neither were they bound by petitioner's declaration that LHC's call thereon was
wrongful.

The right to recover the amounts wrongfully drawn on the Securities, according to it, could
properly be threshed out in a separate proceeding. Court will refrain from making any definitive
ruling on this issue until after petitioner has been given ample opportunity to respond to the
charge.